Thank You

Error.

IT'S A VERY HUMAN IMPULSE to anticipate change with the arrival of spring -- and in the stock market, investors who have endured a brutal winter are keeping their eyes peeled.

The Standard & Poor's 500 rose or fell by more than 1% on just two days last week (or 40% of the time). While this was still more volatile than the historical average near 19%, it felt like a respite from the gut-wrenching 54% suffered so far this year (incidentally, the wildest year since 1938). Is this a sign the market is calming down?

The S&P 500 dipped in March below its January low. Yet the number of individual stocks plumbing fresh hell shrank, with the 10-day average of new lows at the New York Stock Exchange dropping from 463 on Jan. 22 to 295 on March 17. Is that a hint of a stock market on the mend?

Consider the other evidence: Commodities have pulled back since mid-March, with gold suffering its biggest weekly drop in 28 years. Stocks have bounced 5% since March 17, and technology and consumer-discretionary stocks are showing signs of life. Is the stock market shifting from behavior often seen late in an economic boom, when price-to-earnings ratios contract and energy and materials lead, to the start of a new economic cycle?

Fans of the spring-awakening theory were encouraged by the recent expansion in price-earnings multiples, chiefly the result of companies' projected earnings falling faster than stock prices. An index of credit-default risk also broke its persistent upward trek to turn lower -- for now.

But if stocks might be closer to a meaningful bottom, hopes for a swift rebound also could prove premature, and last week they were doused by a pelter of discouraging developments. Personal income actually climbed 0.5% in February but -- Hold the applause! -- purse strings likely will remain taut as consumer confidence plunges to its lowest level since 1973.

"This is somewhat reminiscent of the canyon-ambush scenes in old Westerns, when they say, 'It's not the bullet that gets you, it's the fall,"' says Mike O' Rourke, BTIG-Bass Trading's chief market strategist. "In the case of the financial markets, it is not the liquidity crisis doing investors in, it is the accompanying recession."

The Dow Jones Industrial Average zigzagged to its third decline over the past five weeks, falling 145, or 1.2%, to 12,216. And it's 13.8% off its early-October high. Absorbing its fourth decline in five weeks, the S&P 500 gave up 14, or 1.1%, to close at 1315. The Nasdaq Composite Index eked out a three-point gain to rise 0.1%, to 2261, while the Russell 2000 index of small stocks gained 2, or 0.3%, to 683.

Plunging consumer confidence can be a contrarian indicator. "We believe stocks can rise from here, despite an uncertain economic picture," says JPMorgan strategist Thomas Lee. "The credit crunch seems to have crossed the apex of the crisis, and we expect the focus to shift to inflationary and recession dynamics."

But are we on the cusp of a new economic cycle? "I think people are so eager to transition from late-cycle to early-cycle growth, they've leap-frogged over the recession in between," says Richard Bernstein, Merrill Lynch's chief investment strategist.

Bernstein had advocated a more defensive stance as early as last summer, and he continues to nudge investors toward less-risky segments like consumer staple stocks and high-quality bonds. Although market consensus has since caught up to his more cautious views, he remains wary of the jostle to catch the "next big beta trade."

While the Federal Reserve began cutting borrowing costs more than six months ago and has since injected billions into the financial system, a swift economic rebound isn't assured. Case in point: Bank stocks did not reach a trough until late in 1990, some 16 months after the Fed began easing, and the economy struggled on for longer. "And the credit bubble is bigger this time around," he says.

Hiding out in commodities and materials isn't safer either. "People should not be investing for inflation today, and I think inflation is a 2007 story that has lagged into 2008," Bernstein says. Among other things, commodities are a lagging indicator, and have seen considerable speculative buying. Yet fundamentals continue to erode, and, among stock sectors over the past two quarters, energy and materials have produced the most negative earnings surprises.

A FRANTIC PLEA CAME ON Friday directly from the American Trucking Association, which urged the Bush administration to "act quickly" to ensure an affordable supply of oil for the nation's 3.5 million truck drivers. Truck drivers have lowered speed limits and curbed idling, but are still expected to spend $135 billion on diesel fuel this year -- $22 billion more than last year.

Some of these stocks are pushing five-year or even decade highs for good reason: Companies have gotten more efficient and are earning more for each load carried. Revenues have risen steadily with global growth and the freight boom. Landstar, for instance, has a global logistics business and has been buying back shares. The rush to cover short bets also may have helped driven prices up recently.

But what lies ahead? While rail companies benefit from increasing exports, truckers are more dependent on the U.S. consumer's appetite for Asian-made goods. Among recent yellow lights: signs that more trucks are running below capacity; and declining loads of smaller shipments.

Bulls hope that slack demand and problems with overcapacity have reached a bottom, and that truckers can continue to pass on rising costs. Any rebound in the greenback also could help American purchasing power. But rich stock prices have tilted the risk-reward profile.

At about 53 recently, Landstar, for example, is approaching the consensus Street target of about 55. It is trading at 23.8 times 2008 earnings, versus 13.5 times for the sector. Landstar and J.B. Hunt are trading at 15 times and 11 times their respective book, or accounting, values. Valuations could come under threat if diesel prices continue to climb, and if the economic rebound takes longer than expected to arrive.

IT'S A DIFFICULT QUESTION: Are sneakers really a discretionary purchase?

To the generations who buy them for aesthetic -- as well as athletic -- reasons, the sneaker is so much more than just a shoe. Yet Wall Street clearly thinks otherwise, judging by the 51% slide suffered by
Foot LockerFL -0.7702020202020202%Foot Locker Inc.U.S.: NYSEUSD78.59
-0.61-0.7702020202020202%
/Date(1481302131108-0600)/
Volume (Delayed 15m)
:
203552
P/E Ratio
16.982758620689655Market Cap
10483308031.1127
Dividend Yield
1.3959390862944163% Rev. per Employee
162892More quote details and news »FLinYour ValueYour ChangeShort position
(FL) over the past year.

Of course, Foot Locker's troubles go beyond a consumer squeeze brought on by falling home equity and rising gas and food bills. The stores are dull and the merchandise uninspiring -- both out-of-step with a sportswear world where fashion and form increasingly matter as much as function. Shutting stores and cleaning out its inventory closet cost the company, which posted its first quarterly loss in six years in 2007. This month, it reported a 23% drop in fourth-quarter net income and issued a drab 2008 forecast.

What Follow-Through? Momentum from the prior week's 3.4% rally evaporated, as recession fears sent the Dow down 1.2% -- its third loss in five weeks.

After a distracting and ultimately failed attempt to buy rival
GenescoGCO -1.264933239634575%Genesco Inc.U.S.: NYSEUSD70.25
-0.9-1.264933239634575%
/Date(1481302016789-0600)/
Volume (Delayed 15m)
:
26267
P/E Ratio
15.182403433476395Market Cap
1467468781.47125
Dividend Yield
N/ARev. per Employee
106087More quote details and news »GCOinYour ValueYour ChangeShort position
(GCO), "management is refocusing on running lean and mean, and sales may be at trough levels," says M. Kevin Flynn, president of Lexington, Mass.-based Avalon Asset Management. Pricier items are still moving well, sales at European and Asian stores are still chugging along, and the company has made more headway in clearing out its glut of mid-price inventory.

And let's face it, people still need shoes. Once the footwear of choice for skaters and slackers, sneakers are now worn everywhere from Sunday brunch to the Grammy awards. Sneakers are to young men what neckties were to boomers -- the acceptable article for sartorial self-expression -- and the sneaker boom can only grow with the swelling middle class overseas.

"Although the current retail environment is difficult, this may prove an opportunistic time to build positions in retailers with good balance sheets and strong cash generation," Flynn says.

He sees maximum stock downside at about 9 if the U.S. slips into a vicious and prolonged recession and if the Dow falls to 11,000. But Foot Locker has a cash stash of more than $3 a share, and an annual dividend yield of about 5.2%, all of which should provide a little cushioned support if the going gets tough.